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Purchasing Purchasing

THE OBJECTIVES OF PURCHASING 1. PROVIDE APPROPRIATE LEVELS OF SUPPLY + 2. THE APPROPRIATE THE OBJECTIVES OF PURCHASING 1. PROVIDE APPROPRIATE LEVELS OF SUPPLY + 2. THE APPROPRIATE LEVEL OF QUALITY + 3. THE LOWEST TOTAL COST

WHAT COMPANIES REALLY PAY FOR OWNERSHIP • Cost of ownership goes beyond the price WHAT COMPANIES REALLY PAY FOR OWNERSHIP • Cost of ownership goes beyond the price paid for a product • TOTAL COST OF OWNERSHIP = PRODUCT PRICE + + + + DELIVERY INSTALLATION MAINTENANCE / REPAIR POWER COSTS SUPPLY COSTS OPERATING COSTS FINANCING

PURCHASING PARTNERSHIPS ARE MADE WITH VENDORS WHO PROVIDE: • • • High-purchase-volume materials Components PURCHASING PARTNERSHIPS ARE MADE WITH VENDORS WHO PROVIDE: • • • High-purchase-volume materials Components Strategic products Product use information/training Specialized knowledge for cost reductions and/or performance • Materials unavailable elsewhere

Steps in the Business Buying Process 1. 2. 3. 4. 5. 6. 7. Recognizing Steps in the Business Buying Process 1. 2. 3. 4. 5. 6. 7. Recognizing the need Developing product specifications Soliciting bids from potential suppliers Making the purchase decision Issuing the contract Inspecting delivered goods for quality Evaluating vendor performance

MAKE-OR-BUY DECISION ANALYSIS RISK ASSESSMENT FINANCIAL RISKS Resource Allocation Investment of Resources Accurate Cost MAKE-OR-BUY DECISION ANALYSIS RISK ASSESSMENT FINANCIAL RISKS Resource Allocation Investment of Resources Accurate Cost Analysis Legal Issues MARKETING RISKS Customer Impact Supplier Impact MANUFACTURING RISKS Reliability Expertise Equipment Patent Protection POLITICAL RISKS Management commitment/ willingness to partner Turf Battles Internal Strife ACCEPTABLE RISK Buy the Products, Components or Services UNACCEPTABLE RISK Retain Production and Provide Services

Quotations and Contracts • RFQ: Request for Quotation • RFP: Request for Proposal • Quotations and Contracts • RFQ: Request for Quotation • RFP: Request for Proposal • Boilerplate: – Standard legal clauses (fine print) on RFQs, your bid, and the customer’s order. – May contain terms of sale that contradict terms on your bid, and often contain penalties for nonperformance.

Types of Business Buying Situations • New-task buy: – Business buying situation that is Types of Business Buying Situations • New-task buy: – Business buying situation that is new and very different from anything that the buyer has faced previously. • Straight rebuy: – Most common type of business buying situation; buyer purchases a part, material, or service routinely, with little thought going into buying process. • Modified rebuy: – Reevaluation of alternatives; necessary because buying requirements have changed such that relatively routine buy or purchase no longer is routine.

Examples of Products Purchased Using the Buy-Class Modified Rebuy Straight Rebuy Office Supplies Pure Examples of Products Purchased Using the Buy-Class Modified Rebuy Straight Rebuy Office Supplies Pure routine Vehicles Consulting Services Installations Complete negotiation Electrical Components Electricity Gas/Water Bulk Chemicals New Buy Computer Systems Moon Shot Insurance

Insurance for the Apollo 11 Moonshot Insurance for the Apollo 11 Moonshot

Buygrid Analysis Framework New Buy Modified Rebuy Straight Rebuy Need Recognition Develop Product Specifications Buygrid Analysis Framework New Buy Modified Rebuy Straight Rebuy Need Recognition Develop Product Specifications Solicit Bids Make Purchase Decision Issue the Contract Inspect Goods for Quality Evaluate Vendor Performance Complexity of Buying Situation

Buygrid Analysis Framework New Buy Modified Rebuy Straight Rebuy Need Recognition Develop Product Specifications Buygrid Analysis Framework New Buy Modified Rebuy Straight Rebuy Need Recognition Develop Product Specifications Solicit Bids Make Purchase Decision Issue the Contract Inspect Goods for Quality Evaluate Vendor Performance Creeping Commitment

Multi-Attribute Theory • Product offerings are bundles of attributes. • Attributes provide benefits. • Multi-Attribute Theory • Product offerings are bundles of attributes. • Attributes provide benefits. • Benefits satisfy needs. • Buyers differ in their needs, therefore • Buyers differ in the importance they place upon various attributes. • Some buyers seek to maximize the set of attributes. • Others seek to satisfy most important attributes first.

Role Theory • The differing roles people play (in business, society, or life in Role Theory • The differing roles people play (in business, society, or life in general) have differing norms and expectations. • Examines how people interact in the Buying Center (more than one person is involved in the purchasing decision. ) • In many cases, the buying center is an informal, complex, changing group. • In other cases, it is a formal part of the organization (such as cross-functional teams)

The Buying Center • Consists of those individuals – who participate in the purchasing The Buying Center • Consists of those individuals – who participate in the purchasing decision and – who share the goals and risks arising from the decision • Average buying center includes more than 4 persons per purchase

Roles of Buying Center Members • User – Will use product in question; minimal Roles of Buying Center Members • User – Will use product in question; minimal - major influence • Gatekeeper – Tight controller of information flow to other buying center members; can open/close gate for salespeople. • Influencer – Provides information to other members for evaluating alternative products or sets purchasing specifications; can operate within/outside buying center. • Decider – Makes buying decision; often difficult to ID. • Buyer – Assigned formal authority to select vendors and complete purchasing transaction.

Buying Center Dimensions • Time – Time fragmentation: length of time people are in Buying Center Dimensions • Time – Time fragmentation: length of time people are in the buying center. – Limits members’ influence – Can lengthen decision making time due to inexperience • Vertical – Layers of management involved • Horizontal – Number of departments involved

Clues for Identifying Powerful Buying Center Members • Isolate the personal stakeholders • Follow Clues for Identifying Powerful Buying Center Members • Isolate the personal stakeholders • Follow the information flow • Identify the experts • Trace the connections to the top • Understand purchasing’s role

Individual Forces • Evaluative criteria – education, training, experience • Information Processing – selective Individual Forces • Evaluative criteria – education, training, experience • Information Processing – selective exposure, attention, perception, and retention • Risk-Reduction Preferences – level of uncertainty about outcomes – magnitude of consequences associated with incorrect choice

Selective Perception • Impacts how your buyer views and understands the world • Impacts Selective Perception • Impacts how your buyer views and understands the world • Impacts how your buyer views risk ýSelective exposure. ýSelective attention. ýSelective retention.

Impact of Increasing Levels of Perceived Risk • • • Buying center becomes larger Impact of Increasing Levels of Perceived Risk • • • Buying center becomes larger Higher level managers become involved Information search more active Wider variety of info sources accessed Buying center members exert more effort Sellers with proven track records tend to be more favored • Product quality & after-sale service tend to become more important than price